TaxTMI 
TaxTMI 
1985 (6) TMI 62
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....in which the payment was obligatory. The ITO making the assessment for the assessment year 1977-78 held that the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 stated that a liability can be allowed in the year to which the liability related. Since in the present case the liability related to the assessment year 1975-76 it could not be allowed in 1977-78. The Commissioner (Appeals), however, held that the disallowance was not justified. The addition on this score was, therefore, deleted. This is challenged in the present departmental appeal. 3. The learned counsel for the department has pointed out that the assessee had made a claim of this amount for the assessment year 1975-76. The amount in question undisputedly related to the accounting year relevant to the assessment year 1975-76. On the basis of the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd.'s case, the claim was not allowable in the assessment year 1977-78. In support of his case reliance was placed in the decisions of the Kerala High Court in L.J. Patel & Co. v. CIT [1974] 97 ITR 152 and CIT v. K.A. Karim & Sons [1982] 133 ITR 515 (FB). According to the learned counsel, the decision in....
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....h edition, Vol. 2 at page 1657. Relying on North Arcot District Co-operative Spg. Mills Ltd.'s case, it is pointed out that a different method of accounting, if consistent, can be followed in respect of individual items. The counsel has further relied on the decisions in CIT v. R. Shantilal & Co. [1971] 82 ITR 214 (Cal.), Nathmal Tolaram's case, CIT v. Banwari Lal Madan Mohan [1977] 110 ITR 868 (All.) and Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 (Delhi). The decisions in L.J. Patel & Co. and K.A. Karim & Sons' cases did not apply to the facts or the issues in the present case since the assessee did not even know about the liability in the first place and secondly the entire discussion was subject to the method of accounting followed by the assessee. 6. We have here an extreme case of the inconsistency the department has followed in dealing with the claim. For the assessment year 1975-76, when the assessee properly made a claim, the ITO rejected it. The assessee's learned counsel has urged that the ITO at that time clearly held the expenditure to be allowable for the assessment year 1977-78. Even so, when the assessment for 1977-78 came up, the same ITO held that the jud....
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....uring which it was received. The amount might be paid at any time subsequently. In our view, therefore, the assessee had made a proper claim and in the year in which it should be allowed. Incidentally it requires to be mentioned that the decision in Kedarnath Jute Mfg. Co. Ltd.'s case as rightly contended by the learned counsel for the assessee, only stressed the point that even though the expenditure is not debited to the profit and loss account, if it had already arisen the assessee could claim it. In that decision there is nothing to show that depending on other factors like complete ignorance of the existence of any liability or the method of accounting followed, the claim can be allowed only in that year. This view does not get support even from the other decisions referred to for the department. It would be strange for an assessee to think of a claim and debit it into the profit and loss account for a year when he does not even know of it. The decision in Kedarnath Jute Mfg. Co. Ltd.'s case and similar decisions refer to cases where there is a specific liability. If the assessee was under the honest impression that there was no purchase tax on goods to be exported he could ce....
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....cture' and 'production' are not defined in the Act and must, therefore, according to the learned counsel, bear the ordinary meaning. Referring to authorities in this connection it is pointed out that 'manufacture' implies that commercially a new product is brought into existence. Every change in an article is the result of treatment, labour and manipulation but every change is not 'manufacture'. In order to constitute 'manufacture' something more is necessary and the expending of labour must be carried to such an extent that the article suffers a series of transformations. A new and different article must emerge. Reference is made in this connection to the decisions in Dy. Commissioner, Sales Tax v. Pio Food Packers AIR 1980 SC 1227 and Chowgule & Co. (P.) Ltd. v. Union of India AIR 1981 SC 1014. These decisions clearly establish that in manufacture the end product must be a commercial commodity different and distinct from the original item. The counsel has relied on the three tests for 'manufacture' elaborately discussed in Idandas v. Anant Ramchandra Phadke AIR 1982 SC 127. In the present case, there is no 'manufacture' as understood and clarified by these decisions. Reference is....
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....lear distinction between the raw materials in this case and the finished product. What is caught or brought from outside are not the same as the things sold. Referring to the provisions of sections 80J, 33 and 32A of the Act it is pointed out that the words 'manufacture' and 'production' occur in the three sections 80J, 33 and 32A. The provisions of the Fifth Schedule of the Act are equally noticeable. In this connection special mention is made of Fifth Schedule wherein at entry 30 reference is made to 'processed (including frozen) fish and fish products'. The use of these expressions clearly indicates that the Legislature has understood frozen fish and fish products as something different from the previous existing commodity. The decision in Singh Engg. Works (P.) Ltd.'s case is of great significance in this context. Other decisions of the High Courts referred to also support his case. 13. On behalf of the interveners Naik Ice & Cold Storage, Ratnagiri, Ratna Sea Foods, Ratnagiri and Gadhre Marine Products, Ratnagiri Shri Gadgil pointed out that in several decisions the Tribunal accepted the applicability of these reliefs in the case of fish industry. These assessees also caugh....
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....ct even in earlier cases like Union of India v. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791 and CST v. Dr. Sukh Deo [1969] 23 STC 385 (SC) the matter was considered. Emphasis was laid on a material change to the final product from the raw materials. But all these decisions indicate that whether there is a manufacture or not depends on the facts of each case. A rule of thumb cannot be applied. The learned counsel has also pointed out that the decisions stress that it is not necessary in every case that the characteristics of the original material should change. It is not necessary that the material used in the process, production or manufacture should lose its basic property or get transformed itself. A complete transformation is not regarded as absolutely necessary. Stress is laid in this connection on the decisions in CIT v. Lakhtar Cotton Press Co. (P.) Ltd. [1983] 142 ITR 503 (Guj.) and North Bengal Stores Ltd. v. Member, Board of Revenue 1 STC 157 (Cal.). That the general principles evolved have to be applied to the particular facts is clear from the decisions in Lakhtar Cotton Press Co. (P.) Ltd.'s case and CIT v. Perfect Liners [1983] 142 ITR 654 (Mad.). The Tribunal....
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.... commodity as end product it is pointed out that the question for consideration under section 5(3) of the Central Sales Tax Act was entirely different from that coming up for consideration under the Income-tax Act. The Sales tax Act, according to the learned counsel, does not require in fact any elaborate enquiry into the process of manufacture or production. On the contrary it gave the assessee certain exemptions and advantages in order to achieve certain policy objectives. The decisions reported in the context of the Sales Tax Act should, therefore, be appreciated against this background. The argument of the learned counsel in this context is that being an exemption-giving section the High Court and other authorities have interpreted the sales tax provisions in a liberal manner to help the assessee. The same interpretation should not be addressed or applied to different provisions under the Act to give just the reverse policy effect, namely, to deny the assessee a benefit that is clearly intended for him in the larger interest. 17. The learned counsel has in this connection referred to a series of decisions where the fact of 'production and manufacture' has been accepted, such....
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....ring industry and hotels. If the type of interpretation sought for by the department were to be justified, according to the learned counsel, cold storage would not have found a place where it is in section 80J. The expression 'in a manufacturing process' also occurs in section 80HH. In short it is the case of the learned counsel that not only should the general principles and the general meaning of these expressions be applied to the facts of the case but a comprehensive and purposeful interpretation should be adopted consistent with the liberal and benevolent approach of the circulars of the CBDT. 19. The assessee-company is engaged in the business of catching fish, processing them and also in the export of marine products. It claimed relief under section 80J in respect of its business. Under section 80J where the gross total income of an assessee includes any profit and gains derived from any industrial undertaking or a ship or the business of a hotel to which that section applies, relief is granted by way of a deduction from such profits and gains. Sub-section (4) of section 80J lays down the conditions requisite for the grant of the relief and is as under: "(4) This secti....
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....ashed and mixed with a lot of crushed ice before loading in transport vehicles. V. Transportation : Transportation to peeling sheds, often in insulated vans. VI. Washing and weighment : Shrimp are again washed and weighed after arrival at the destination. VII. Beheading/Peeling : Depending upon the quality of shrimp, the shrimp is either beheaded leaving the shell on for HL (Headless) freezing or beheaded and peeled for PUD (Peeled Undeveined) freezing. VIII. Deveining : Operation of deveining done by removing the gut from the shrimp. IX. Icing and transportation : Shrimp mixed with crushed ice before transportation to freezing units. X. Washing, weighing and storing : At the receipt point for freezing, shrimp once again washed and weighed. If next operation is likely to be delayed, shrimp stored in tubs. XI. Grading : Shrimp graded in different species and sizes. Each lot washed and kept for further processing. XII. Washing, draining, weighing and filling : Each lot washed, water drained by using draining table, predetermined quantities weighed out into waxed cartons inner lined by a thin polythene sheet. Shrimp arranged in carton in slab form. Filled carto....
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....as come to the conclusion that in producing the processed marine products the assessee is running an industrial undertaking. The arguments before us were directed mainly to the questions of 'manufacture' and 'production'. A reading of section 80J would show that the relief is available to an assessee whose gross total income includes profits and gains derived from an industrial undertaking. The further condition laid down by section 80J(4) is that of manufacturing or producing articles. There could, therefore, be industrial undertakings not manufacturing or producing articles, which in view of the stipulation in sub-section (4) of section 80J will not be entitled to the relief. In view of the confused use of the expression 'industrial undertaking' with or without the further qualification of manufacturing or producing by the authorities below, it is perhaps necessary for us to go into the question as to whether the activity of the assessee in the present case constitutes an industrial undertaking in the first place. The further question is whether for the purpose of the exemption under section 80J, manufacturing or production of articles is involved. 21. Like 'manufacture' or 'p....
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....aining its original identity." This case dealt with section 5A(1)(a) of the Kerala General Sales Tax Act, 1963 envisaging the consumption of a commodity in the manufacture of another commodity. The concept of manufacturing was explained in this context. 24. The Chowgule & Co. (P.) Ltd.'s case explained what is processing. Their Lordships of the Supreme Court held that though the blending of different qualities of ore possessing differing chemical and physical composition so as to produce ore of the contractual specifications cannot be said to involve the process of manufacture, since the ore that is produced cannot be regarded as a commercially new and distinct commodity from the ore of different specifications blended together, the operation of blending would amount to processing of ore. The strict question of manufacture or production or the distinction between them do not seem to have been dealt with in this case under section 8(3)(b) of the Central Sales Tax Act. 25. In Idandas' case the third of the cases, the Supreme Court laid down the test to determine whether a lease was granted for the purpose of 'manufacturing process'. The three tests laid down are that it must....
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....ported parts in a 'knocked down' condition. They held that even though the component pads from which the automotive chassis is made retain their individual identity in the whole article which is manufactured or produced, the article produced was totally different from the parts manufactured or involved therein 27. Analysing the decisions certain broad principles emerge. Some activity, work or processing is to be done on some material. The activity or work should result in the transformation of that material into something else. It is not necessary that the final material should be entirely different from the component parts. The component parts could even retain their individual identity in the whole article. The end article should be different from the article with which the activity or processing was started. A heavy dose of processing rarely leaves a commodity unchanged structurally and otherwise. As a corollary the principle emerge that an article subjected to an amount of processing would get gradually transformed and finally it could come to a stage where it is an entirely different article. Whether such a different article is produced at the final stage or an intervening ....
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....ivities such as cutting of the head and tail, peeling, deveining, etc., finally reducing what was an animal fish-alive or dead-into what is merely a mass of edible material is certainly a manner of producing the latter material. The two cannot even be said to be the same for the purposes of section 80J or the other sections of the Act in question. To do so would lead to as much an absurdity as to say that a live man is the same as the flesh of a man or a live goat is the same as meat. We have no doubt that even at this stage what was an animal alive or dead has become a mere edible material like meat or processed vegetable. This product is further subjected to both physical and chemical processes. It is subjected to heavy pressure and temperature below zero degree. The learned counsel for the department has explained all these processes as merely convenient modes adopted for reducing the volume and preserving. We do not think that this approach would be correct. Even though these results also incidentally arise, when a mass-like material is subjected to excessive pressure at below freezing point temperature and on the top of it when this is done after the addition of chemicals, one....
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....d to the relief under section 80J, we do not see how the relief can be denied for the entire business. A storage plant is useful only if it is worked. The assessee can work its storage plant for preserving the products of others or its own goods. Where it does not take goods from others the whole integrated activity and the storage plant is fed by goods purchased and processed by the assessee, the entire business could be regarded as working a storage plant for profit. In the context of section 80J, we see no difference between a storage plant wherein the assessee puts others' goods and recovers rent and the other case where the assessee itself purchases goods, puts them in the storage plant and sells them. In both the cases, the cold storage plant is operated. The fact that in one case the rental from outsiders is the receipt of the storage plant rather than the difference between the purchase and the sale price of the assessee's own commodities, may not, in our view, make any difference. In other words, where the assessee operates its cold storage plant or plants and as an integrated part of such operation deals in its own commodities that itself would entitle the assessee to the....